Alt-A Mortgages: Don't panic

So says the FT:

The idea of just handing the keys back and walking away from a house worth less than the loan made against it tends to catch the imagination. Hence fears that the expiry of initial fixed rates on Alt-A loans could result in another wave of foreclosures, just as the pain in the sub-prime segment appears to be peaking.

Yet there are reasons for cautious optimism. Alt-A borrowers have better credit records than sub-prime debtors, and the pool of Alt-A mortgage backed securities is smaller - about $600bn for loans made between 2005 and 2007, compared with about $1,000bn for sub-prime. Home owners will not necessarily default just because plummeting home prices have left them with negative equity. Research by the Boston Federal Reserve examining house price falls in the early 1990s found that while negative equity was a necessary condition of foreclosures, borrowers also had to run into cashflow difficulties before losing their homes.

Will they? Many of the Alt-A mortgages were made with interest rates typically set at between 5.5-7.5 per cent for those with a fixed period of 12 months or more. These then "reset" to adjustable rates. With wholesale interest rates currently low, those resetting will see little shift in their interest cost. Instead, it is the end of "interest-only" periods that will be most painful. New research by CreditSights out this week, however, suggests principal re-payments kick in within the first three years in only 4 per cent of 2005-origin Alt-A mortgages and in only 1 per cent of those of 2006 vintage. That is a significant ripple, but not a wave.

After every bubble, there's generally a sort of an anti-bubble--when analysts start looking for reasons that this is, like, the worst crisis ever.  The worries about Alt-A mortgages seem to me to be largely part of this fever.  "Everything in the future will be exactly like everything that just happened" is what got us into this mess in the first place . . .

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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